I’ve said it before…
And I’ll say it again…
If you want to get better at trading pin bars and improve your results, you MUST learn how to determine why they form in the market… no if’s, no buts.
Wick size, the location of the pin – i.e, whether it forms at a technical level – and it’s general construction (body location – overall size) all play their part, of course. But compared to what caused the pin to form in the first place, these are tiny factors and only have a minor effect on whether the pin ultimately causes a reversal.
So, what are the reasons a pin bar forms; what creates them?
Well, there are three things…
- Trade Placing
- Closing Trading
These reasons cause 90% pin bars to form in the market, with most being profit-taking pins – a big part of why trading pin bars is so inconsistent.
Now figuring out why a pin bar has formed isn’t easy… it’s “well ard” as they say here in the UK.
BUT, I know a couple of small tricks that can really help you out…
And I’m going to teach you how to use them in your own trading today.
Let’s take a look…
The BIG Problem With Trading Pin Bars
Take a look at the pin bar below…
According to most price action experts, this bearish pin has a great chance of causing a reversal. It has a long wick, small body, and has formed at a major resistance level.
All in all, it should cause the price to reverse.
But look what happens…
Price continues to rise! The pin hardly caused it to fall an inch.
Most people would put this down to bad luck… Some pins fail; it happens.
And while that is the case for many pin bars, there’s another much more likely reason this pin failed to initiate a large reversal…
It developed from the banks taking profits off their trades.
95% of price action sites assume pin bars form for the same reason: people buying and selling to make the price reverse.
And you know what, they’re right: pins do develop from traders buying and selling – how else would they form (Duh!). But, let’s think about this for a minute, because traders don’t always buy and sell for the same reason, right? Sometimes they buy because they want price to reverse.
Other times, they buy indirectly from taking profits off a sell trade.
And which group of traders is doing this buying or selling? Forex is loaded with different traders – banks, retail traders, business, etc – so who’s behind the buying or selling creating the pin?
Is it retail traders, traders like you and me?
Is it institutional traders, such as those who work in banks?
Could it be a company buying or selling or business reasons?
None of these factors get considered by most guru’s when it comes to pin bars, yet they all play a HUGE part in whether or not a pin will cause a reversal or not.
The fact is this: Most pin bars you see (upwards of 90%) are created by the banks buying or selling.
And what the banks do to create these pin bars – place trades (rare), take profits (all the time), and close trades (also rare) – is the biggest factor that determines whether they generate a reversal.
This is why it’s so important to understand how the banks think and make decisions to trade pin bars effectively.
Here’s another seemingly ‘perfect’ pin.
Like the other example, it has all the right features; a long wick, tiny body, and has formed at a strong support level – in anyone’s books, this is a great pin.
But again, it doesn’t cause a reversal… why?
This pin failed not because it formed at the wrong technical level or didn’t have the right features. It failed because it formed by the banks taking profits off their trades – sell trades in this case.
Look at where the pin appeared…
What do you think the banks, who are short remember, will do after seeing a gigantic drop double or even triple their profit; what’s their first thought:
To take profits?
To sell again?
To close the trade?
Put yourself in the same situation… what would YOU do if price suddenly tanked, tripling your current profit?
Take some off, right?
You might say close the trade… which is a valid call too. In most cases like this, however, the banks some take profit off their trades – they rarely close due to the trade size. Of course, to take profits, the banks must buy back some of what they sold, causing price to rise and creating…
A picture-perfect bullish pin bar right at a powerful support level.
See why it’s so important to understand why a pin bar forms now?
It’s the ONLY factor that really determines the probability of a reversal, as we’ve seen in the examples. On the surface, both pins looked amazing. Beyond the chart, however, the pin had little chance of causing a big reversal because it developed from profit taking; the banks wanted price to continue falling after it formed.
So, now you know why it’s so important to determine what’s causes a pin bar to form, let me show a couple of ways you can figure out why they’ve formed yourself.
How To Figure Out Why A Pin Bar Has Formed – 2 Easy Ways
Figuring out why a pin bar has formed isn’t easy, and really, not something I can explain in just one article – or even a few for that matter.
I do know a couple of simple guidelines you can follow to avoid most of the low probability pin bars (profit-taking pins) and instead trade more of the high probability pins – pins that created by the banks placing trades.
Here’s what they are…
Avoid Pins That Form After Sharp Rises/Declines
If you want to improve your pin bar results, avoid trading profit taking pins – pins that form from the banks taking profits off their trades.
These pins have the lowest probability of causing a sustained reversal since the banks ultimately want price to continue in the previous direction; they want to make more profit from their trades. So soon after the pin bar forms, price will reverse against and continue in the direction it was moving in previously.
Profit-taking pins are a big problem because they’re the most common type of pin bar.
Simply put: They form EVERYWHERE.
Many, if not most, of the pins you see and probably trade are profit-taking pins with little-to-no chance of creating a large reversal. I’d estimate that at least 60% of pin bars are profit-taking pins; that’s how common they are.
So, how do you avoid trading them?
Well, the easiest way is to STOP trading pin bars that form after sharp rises or declines.
9 times out of 10, these pins form from the banks taking profits off their trades.
And it comes down to what I explained earlier…
The sharp rise dramatically increases the bank’s profits, so naturally, their first thought is to take some off.
That way, they can secure the money for future use, whether that be in the market, e.g, for placing more buy trades later on or for other reasons outside of trading – banking reasons, for example.
The problem is, when they take profits, price moves in the opposite direction, often creating a pin bar.
These pins usually look AMAZING, as the one above does. They contain all the features we associate with high probability pins – big wick, opposite close – and often form at one or more significant technical points. But since they develop from profit-taking, these pins DO NOT have a high probability of being successful.
Because what do the banks want to happen after they take profits?
They want price to continue IN THE SAME DIRECTION.
So after the pin forms, price may retrace a little as they take profits, but it’ll soon reverse and begin rising again because they want price to continue higher.
That’s what happens in our example…
After a small retracement, which many people who trade the pin will perceive as being confirmation of a reversal, price reverses, and another upswing begins.
My point is clear: If you want to improve your results, steer clear of profit-taking pins.
I know not all pins that form after sharp rises and declines develop from the banks taking profits, but the vast majority do, and you’ll do yourself a big favour by avoiding them. Stick to the pin bars with big wicks, and try to think more about why they might have formed in the market.
That should help you filter out the weak pins, allowing you to avoid many losses.
Speaking of big wicks…
Look For Pins With Exceptionally Big Wicks
One of the most oft-repeated tips you hear with pin bars is to focus on trading the pins with large wicks that stick out from the surrounding price action – heard this before?
It’s a great tip, and generally, one that’ll keep you trading the right pins… most of the time, at least.
My tip is similar, but with one key difference:
Rather than trade pin bars with decently sized wicks, you trade pins with HUGE wicks.
I’m talking wicks so big they don’t just stick out from the surrounding PA but are so obvious anyone can spot them within 5 seconds of seeing a chart. Pins like this, for example…
Seen these before?
This pin has a HUGE wick, anyone and everyone can easily spot with just a quick glance at the chart.
These pins typically form from the banks placing trades; that’s why they’re 1. so rare and 2. have such a big wick. The wick size tells you how many traders bought (or sold, in our case) when the pin was forming. Remember: the banks can only buy or sell when lots and lots of traders are doing the opposite.
Buying if they want to sell.
Selling if they want to buy.
The more traders that are buying or selling, the more the banks can buy and sell themselves.
So, if a pin has a large wick, that reveals lots of traders bought or sold.
That, in turn, tells us the banks must have bought or sold a significant sum themselves to push price in the opposite direction against these traders and create the wick in the first place. This is why the wick plays a role in whether a pin causes a reversal or not:
It visually reveals via its size how much the banks bought or sold to make price reverse.
Keep your eye out for these pins going forward…
They don’t form often, but boy when they do, you bett the signals they give reversals they generate are typically massive and they rarely fail.
With these two tips, finding powerful pins bars should be A LOT easier.
BUT, and I can’t stress this enough: you MUST learn why pin bars form. It’s the #1 factor in whether they’ll be successful. Wick size and location (i.e: support or resistance) all play their part, yes – always check them. But it’s why the pin forms that’s so important and what ultimately determines if it’s a worthwhile trade or not.
So, focus on trading the pins with especially big wicks, like I explained above…
That should improve your results in a big way and help you be more consistent trading pins.